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Apple Downgraded for First Time Since October; Shares Drop

An Apple Inc. logo hangs above the entrance at the Fifth Avenue store in New York. Photographer: Jin Lee/Bloomberg
An Apple Inc. logo hangs above the entrance at the Fifth Avenue store in New York. Photographer: Jin Lee/Bloomberg

March 16 (Bloomberg) -- Apple Inc., the world’s most valuable technology company, fell the most since June on the Nasdaq after an analyst downgraded the stock, citing risks related to manufacturing partner Foxconn Technology Group.

Alex Gauna, an analyst at JMP Securities LLC, said slower sales growth at Foxconn’s Hon Hai Precision Industry Co., whose Chinese factories make Apple devices, may signal lower-than-expected revenue for Apple. Sales growth at both companies was tightly coupled last year, Gauna said in a research note today in which he lowered his rating on Apple shares to “market perform” from “market outperform.”

The downgrade is the first for Apple since October, when Gus Papageorgiou at Scotia Capital and Jens Hasselmeier at Independent Research GmbH reduced their ratings. Of the 55 analysts covering Apple tracked by Bloomberg, 50 recommend buying the shares while five rate it a “hold.” Gauna cut his second-quarter sales target for Apple to $22 billion from $23 billion, and his profit estimate to $5.10 a share from $5.49.

“My sense in talking to investors was that they were not paying attention to this deceleration,” Gauna said in an interview. “We’ve seen estimates going uniformly in one direction, and that strikes me as dangerous.”

Apple, based in Cupertino, California, fell $15.42, or 4.5 percent, to $330.01 at 4 p.m. New York time in Nasdaq Stock Market trading, compared with a 2 percent drop in the Standard & Poor’s 500 Index.

Hon Hai Growth

Hon Hai’s sales growth slowed to 26 percent in February from 84 percent in December, Gauna said. The earthquake and tsunami in Japan, where Apple generates about 6 percent of its sales, also present near-term risks for Apple, he said.

The slower growth at the Foxconn unit may signal that Apple won’t beat analysts’ estimates as much as it has in the past several years, which could lead to a stock slide, Gauna said. Apple typically exceeds estimates by 23 percent, he said.

“I just want to make sure our investors are aware of the heightened risk going in to this quarter,” he said.

Some analysts disagreed with Gauna’s conclusions. Yair Reiner of Oppenheimer & Co. said Apple’s contributions to Hon Hai’s revenue is limited and isn’t a good proxy for gauging Apple’s performance. He called the correlation a “coincidence.” Brian White of Ticonderoga Securities LLC suggested investors buy Apple after today’s decline.

Independent Research’s Hasselmeier, who had cut his rating to “hold” in October, raised it back to “buy” in January.

IPad 2 Demand

Apple released the iPad 2 on March 11, and stores across the U.S. have sold out. Waits to receive a model from Apple’s online store are taking as long as five weeks, up from less than a week when the device went on sale.

“The overwhelming success of the iPad 2 launch over the past few days and another day of iPad 2 stock-outs this afternoon at Apple stores provides further evidence of the momentum Apple has in the marketplace,” Ticonderoga’s White said in a note to investors.

Even with today’s downgrade, Gauna said there aren’t any long-term fundamental concerns about Apple. The average 12-month price target for the stock is $434.56, about 30 percent above today’s price.

To contact the reporter on this story: Adam Satariano in San Francisco at asatariano1@bloomberg.net

To contact the editor responsible for this story: Thomas Giles at tgiles5@bloomberg.net

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